INCO - INCO: Low-Cost Vehicle To Ride The Consumer-Led India Growth Story

Summary

• The Indian consumer growth engine remains at full steam.
• The Columbia India Consumer ETF offers investors a low-cost vehicle to ride the secular growth.
• With the near-term backdrop also turning favorable, the ETF is a worthy addition to any portfolio.

India has been a consumption-led growth story for a while now, with private consumption expenditure consistently contributing >50% of its GDP. This likely won't change anytime soon given the secular drivers in place - the country not only stands to benefit from a 'demographic dividend' (i.e., a young population and declining age dependency) but also continues to see a steady rise in per-capita income alongside the overall economic growth.

As a result, India has consistently been able to convert its GDP growth into earnings, particularly on the consumer side. In tandem, the sector-focused Columbia India Consumer ETF ( INCO ) has compounded at an impressive high-single-digits percentage pace over the last decade. Going forward, it's hard not to see more outperformance here, given the premiumization theme should benefit the best-in-class consumer brands in the INCO portfolio. The equity declines over the last year have also driven valuations to more reasonable levels, presenting investors with a compelling entry point.

Fund Overview - A Low-Cost Vehicle for Indian Consumer Exposure

The US-listed Columbia India Consumer ETF seeks to track, before fees and expenses, the performance of the Indxx India Consumer Index, a free-float adjusted market cap-weighted index comprising companies in the Indian consumer industry listed on the primary exchange of India. Per the latest disclosures , the ETF charged a 0.77% gross expense ratio, making it a cost-effective option for US investors looking to express a single-country, single-industry view of the Indian consumer. A summary of key facts about the ETF is listed in the graphic below:

Within the consumer universe, the fund's sector allocation skews toward Consumer Discretionary at 55.7%, with the remainder allocated to Consumer Staples. By industry, the portfolio breakdown is as follows - Automobiles (34.8%), Personal Products (16.7%), Food Products (13.7%), and Auto Components (9.0%). On a cumulative basis, the top five sectors accounted for ~81% of the total portfolio, with automobiles and related components standing out as a key source of concentration at 43.8%.

In line with the Indxx India Consumer Index, the ETF is spread out across 30 holdings. The largest single-stock exposure is to automotive manufacturer Mahindra & Mahindra ( MAHMF ) at 7.8%, followed by diversified Indian conglomerate I.T.C. Ltd. ( ITCTY ) at 7.4%, and food company Britannia Industries ( BRTQY ) at 6.3%. The ETF also has outsized holdings in another leading auto manufacturer Maruti Suzuki India ( MRZUY ), at 5.6%, and Indian consumer goods company Hindustan Unilever at 5.4%. The top five holdings account for ~33% of the overall portfolio, so despite having a limited number of holdings, this ETF is fairly diversified from a single-stock perspective.

On a YTD basis, the ETF has declined by 1.2% but has compounded at an impressive ~9% pace (in market price and NAV terms) since its inception in 2011. By comparison, the iShares MSCI India ETF ( INDA ) compounded at ~6%, while the iShares MSCI China ETF ( MCHI ) compounded at ~2% over a similar time frame.

The fund distribution runs on an annual basis, with the trailing twelve-month yield at ~11%, though most of this was due to capital gains. The income portion yielded <1%, reflecting the fund's concentration on growth-oriented names that tend to reinvest, rather than distribute their excess cash.

Near-Term Consumer Setup is Compelling

Coming off a challenging year for equity markets globally, the 2023 backdrop looks a lot better for Indian consumer names. With economic activity continuing to regain momentum following the shock of last year's rate hikes, the sector is guiding to a stronger earnings trajectory, supporting the increasingly positive investor sentiment. Within the consumer universe, INCO's emphasis on autos could prove to be a winner given the favorable post-COVID demand rebound, as well as easing supply chain pressures. Beyond the premium end, names like Mahindra & Mahindra and Maruti Suzuki also stand to benefit from a rural-led two-wheeler demand recovery following the increased agriculture and infra-development credit allocations post-budget.

Elsewhere, retail names like Avenue Supermarts remain on track for sustained network expansion, supporting an attractive earnings growth runway. Even with retail names underperforming last year, the cyclical weakness should gradually reverse as inflationary pressures subside. Similarly, for consumer durables names, which also suffered earnings downgrades from the broader consumption slowdown and commodity price volatility, growth looks poised to return this year. With valuations also yet to fully recover here, investors stand to benefit both ways (re-rating and earnings upside).

Long-Term Tailwinds Intact

There's a lot to like for the long-term investor as well. India has long been a consumption-driven economy (>50% of its GDP), and with annual growth still running in the high-single-digit, all signs point to consumption retaining an outsized share of GDP through the coming years. The key is the pace of upward mobility across income levels, along with the secular premiumization theme. Lessons from similar emerging market growth stories tell us that a growing middle class means more demand for discretionary goods and services; INCO's high share of discretionary over staples leaves the fund well-positioned to capitalize.

The only gripe I have with the INCO portfolio is that it under-indexes to pure-play e-commerce at a time when penetration has accelerated due to COVID. That said, the traditional retailers within its portfolio are also adopting integrated digital/physical roadmaps. For instance, key holding Hindustan Unilever has launched numerous digital initiatives, most notably efforts to digitize B2B demand generation via its Shikhar app and demand fulfillment through its automated warehousing pilot, Samadhan. In essence, the leading franchises in the INCO portfolio, via omni-strategy plays, remain poised to benefit from consumption - regardless of channel.

Low-Cost Vehicle to Ride the Consumer-Led India Growth Story

The Indian consumption-led growth story still has legs given the favorable socioeconomic drivers, including a mix of the 'demographic dividend' and an expanding middle class. Alongside these changes, premiumization will be a key theme, and INCO's portfolio of leading consumer franchises is poised to benefit. After the drawdown over the last year, valuations are now also at more palatable levels, providing investors with a compelling opportunity to accumulate here.

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